Do you need access to cash tied-up in your property? Are you thinking about releasing some of your equity? Then allow us to help with our Equity Release Myth Buster Guide. We’ll explain everything you need to know about unlocking the value of your home, including any potential risks, what you need to qualify, and how much it will all cost.
Equity release can be a great way to get a lump-sum of cash for essential home improvements, upgrading to a larger home, or planning for your retirement but, it is not suitable for everyone, and you should consider your options carefully before signing on the dotted line.
What Is Equity Release?
As the name suggests, equity release is a way to unlock capital tied up in your property and turn it into accessible cash. You can do it in two different ways, either with a lifetime mortgage or with a home reversion scheme, and you can take the money as a single lump sum or in several smaller instalments.
Equity Release with Lifetime Mortgage
An equity release lifetime mortgage is the most popular option and recommended for those who want to leave an inheritance. Unlike traditional mortgages, you do not repay this type of loan with monthly instalments, but settle when you die or sell your house. The lender will receive the total amount borrowed, including any interest, and the remaining proceeds from the sale will go to your estate.
Typical APR on a lifetime mortgage is 5 per cent, however, as you don’t make monthly repayments, interest compounds rapidly, and your loan amount increases all the time (doubling every 12-14 years). Some lenders offer drawdown lifetime mortgages, which allow you to pay back some of the interest accrued, but not all, so consider this when comparing plans.
Equity Release with Home Reversion Scheme
Using a home reversion plan for equity release is most suitable for those who do not have children and are not concerned about leaving an inheritance. With this option, you sell a percentage of your property at below market value to receive a tax-free lump sum and have the right to live in your home rent-free until you die. For example, a lender may offer around £40,000 for a 40% share in a £200,000 house – much less than the £80,000 it is worth.
When your house is sold, the lender receives the percentage agreed to in the home reversion scheme, and the rest goes to your estate. Based on the previous example, the lender would get at least £80,000 (their 40% share) or more if the value of your property rises.
Do I Qualify for Equity Release?
While different lenders have different qualification criteria when it comes to equity release, the following rules apply to most:
1. You (or the youngest owner of your home) must be at least 55 years old
2. The age limit increases to 65 if you want to apply for a home reversion scheme
3. You can only apply for your primary residence
4. Your property much be based in the UK – you cannot apply for equity release on overseas properties
5. You property must be in good condition and worth over a certain value (usually 70k)
6. You have little or no outstanding mortgage
You have no dependents living with you
Speak to an independent financial advisor if you would like to apply for equity release but do not meet the above criteria. Some lenders are flexible, particularly when securing lifetime mortgages and home reversion plans on high-value properties.
Can I Still Move Home After Equity Release?
Yes, you can! If your lender is a member of the Equity Release Council, you can move to any suitable alternative property, anywhere in the UK. If you have a lifetime mortgage, you can carry it over to your new home, and you may be able to consolidate it with an additional finance plan if you need extra cash to cover your move.
In the case of a home reversion plan, you will only own a percentage of your property, so this is something to consider when buying a new home - do you have enough equity to move? If you move to a house worth less than your current one, your lender may request that you settle some of your initial equity release sum as they will no longer have the financial security of your original property.
Will My Children Inherit Debt If I Choose Equity Release?
No, they will not. With the ‘No Negative Equity Guarantee Scheme’ imposed by Equity Release Council, no borrower or beneficiaries will have to pay more than the property’s sale value. So you can release your tied-up capital with peace of mind, knowing that your children will not be liable for any debt.
What Are The Risks of Equity Release?
As with all finance plans, there is a certain amount of risk with equity release:
State Benefits & Equity Release: If you are on state benefits, releasing equity from your home could push you over the government’s capital and wealth limits, and you may lose your rights to pension credit, council tax reduction, universal credit, and any other entitlements.
Taking More Than You Need: It can be tempting to take more you need with equity release, but the more you take, the more interest you’ll have to pay, and this will significantly reduce any inheritance you intend to leave to your loved ones.
It’s Expensive: Equity release is an expensive way to raise cash, and you may end up giving away a large percentage of your home for a small return. Some lenders charge as much as 25 per cent in early redemption fees, so if you decide to pay off your loan early, you could receive a hefty bill.
How Much Does Equity Release Cost?
In addition to interest costs, as we explained earlier, you can expect to pay between £1,500 and £3,000 in equity release arrangement fees, including surveyor costs and legal fees.
Equity release is a great way to access money for your golden years, but it comes at a price. You should consider your option carefully before you go down this route, and seek professional financial advice from an Equity Release Council member.